Ritchie and Today

Simon Jack, interviewing me on the BBC Radio 4 Today programme this morning, said he had discussed People’s Quantitative Easing with a range of economists, most of them right wing, and their real fear about it was that the multiplier effect it might have would be too strong.

Let me explain this. The multiplier effect is the impact that £1 of government spending has on growth. A pound of spending by the government always adds to growth by that sum unless (as in time of war) it is so great that it is intended to stop private sector activity: we are nowhere near that situation now. But it also adds additional growth too because the person being paid by the government does then, of course, go on to spend what they get, and the person they spend it with then spends some of what they get, and so on. Duncan Weldon wrote about this rather well when he was still with the TUC.

The size of these multiplier effects is subject to dispute. So, for example, the Office for Budget Responsibility says £1 of government spending on capital may create another £1 of economic activity as well. The IMF says that could be £1.70 extra. But what was really worrying the economists that Simon Jack spoke to was that PQE spending might have too high a multiplier: the impact of the spend would be higher than other types of spending, they said. Or, to put it another way, there might be no better way to stimulate the economy at lower cost than PQE in their opinion. And that is why they did not like it.

Err, no, the worry is that printing M0 and spending it into the economy creates more inflation than spending M4 does.

Because, you know, MV=PQ?

This is monetary economics, not aggregate demand.

Jeebus.

14 thoughts on “Ritchie and Today”

  1. But it isn’t always 100% is it? Sure, schools until about the age of 13 are very good spending, even as badly as the state manages it, but I didn’t get £500 of value from the 2012 Olympics.

    I’m very sceptical about there being anywhere where more money is needed. A lot of things that are good have diminishing returns as you spend more. Spending more on health might be worthwhile, but I can’t think of anywhere else I can see where state investment/spending makes sense. Our road network is pretty much done. High speed rail isn’t worth it. Super fast broadband is more about rural people getting to stream Game of Thrones rather than any real public good.

  2. “But it also adds additional growth too because the person being paid by the government does then, of course, go on to spend what they get, and the person they spend it with then spends some of what they get, and so on.”

    Totally ignores the bloke they got the pound from in the first place.

  3. The Stigler

    I’d spend money on early years education and on dealing with chaotic families (the ones that cost a lot overall). Returns on this are estimated to be quite high. I’d probably spend money on a universal credit that worked (eg not the one that IDS is building).

    I’d like some East-West rail/road links. I’d move the political capital to the north (liverpool or Newcastle) – the whole of the Parliament and Whitehall.

    I’d cancel HS2 and spend less on subbing worthless tertiary education.

  4. Meanwhile Jeremy Corbyn’s eco k.ics guru explains on his blog why Chinese equities are nosediving : the absence of People’s QE in the UK.
    The answer: increase investor confidence by…

    That’s right ; the , er, economist who brought us “send the Governor of the BoE into exile” and ” steal the shares of pension funds and charities without compensation” and “close down any media outlet that doesn’t sign up to the Courageous State” and “how dare you compare me to Zimbabwe” is going to increase investor confidence by…selling lots and lots of government bonds spending, sorry, INVESTING the money in Courageous State projects.

    The World is saved.

  5. ” Our road network is pretty much done”

    Round here they are falling to bits. They have spent some in the past 18 months (perhaps there was an election or something?) but loads more is needed.

  6. Bloke no Longer in Austria

    What does this bloody mean ?

    A pound of spending by the government always adds to growth by that sum unless (as in time of war) it is so great that it is intended to stop private sector activity

    Even in its most deranged war socialist phases in 1916-18 and 41-45 never did the govt. try to shut down the private sector. Private enterprises were paid hard cash with guaranteed profits ( cost plus) to ensure production of Spitfires etc. it just happened to be that the sole customer was the State.

  7. Bloke not in Cymru

    So his argument boils down to they don’t like it because it will work, I know economists are an odd bunch, but that seems a stretch even for them.
    Though given that he doesn’t understand multiple order consequences that would be a logical argument as far as Murphy is concerned.
    As for this ‘in other word’ he veered so far off track at that point it’s a wonder it didn’t induce whiplash

  8. bloke (not) in spain

    ” Our road network is pretty much done”
    About 45 minutes after bumping off the ferry from France, one is inclined to start wondering “what road network”
    As one sits stationary in the M25 Orbital Carpark

  9. I think there are still major roads that still need to be built, M4 relief road around Newport springs to mind, but the environmental issues alone generally usually means they aren’t going to happen anytime soon.

  10. theoldgreenfascist

    It would be helpful, Tim, if you would define M0. It tends to differ from country to country.

  11. Clarissa,

    Exactly. Maintenance isn’t investment.

    And yes, I can think of some roads that could help – improving links across Wales, a good south coast road. I wouldn’t mind the A346 being a better road and the A417 at Birdlip getting sorted out, but none of this is big Keynsian money by today’s standards. Sticking another few lanes on the M25 would cost £5bn tops.

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